FHA must cut exposure to risk, experts say

A federal insurer of home mortgages should be reformed by narrowing the pool of loans it backs and enabling better pricing, experts told a Senate panel on Thursday.

Bad loans insured between fiscal 2007 and 2009 are straining finances at the Federal Housing Administration, which insures mortgages and helps first-time homeowners and lower- and moderate-income borrowers obtain credit due to relatively low down-payment requirements.

While the FHA has taken steps to improve its finances, more work is needed, experts said Thursday at a hearing of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. To shore up FHA’s finances, experts also recommended actions such as authorizing the agency to share risk with private insurers, improving risk detection, and authorizing emergency powers to suspend or modify programs.

“Looking forward, the fund’s capital reserve must be replenished,” said Sarah Rosen Wartell, president of the Urban Institute, a Washington think tank, and a former FHA official. “FHA’s role can be more targeted to supporting lower-wealth, moderate-income families through the reduction of loan limits. Congress also can enhance FHA’s capacity to act quickly to reduce the level of defaults and the severity of losses.”

David Stevens, president of the Mortgage Bankers Association and former FHA commissioner, said Thursday that better risk-based underwriting could help FHA, but warned about going too far.

“The consequences to FHA’s traditional borrowers could be significant if FHA employs overly stringent credit controls. Finding the right balance will be critical,” Stevens said.

FHA has taken recent steps to improve finances. For example, FHA recently announced rules to raise annual insurance premiums for most new mortgages, and lengthen the period during which borrowers pay mortgage-insurance premiums. These changes, along with other factors, should push the FHA fund’s capital ratio into positive territory in the near term, cutting the chances that the U.S. Treasury Department will need to step in, officials said. Read more about FHA’s finances.

Thursday’s hearing follows other recent congressional panels focusing on a troubled FHA. Earlier this month the top Republican on a U.S. House of Representatives committee said the agency is in a “dire” position, and warned of a possible bailout. Read about House hearing.

Separately, a bipartisan group recently recommended that the nation’s housing-finance system should be overhauled by increasing the private sector’s role and eventually eliminating government-sponsored mortgage buyers Fannie Mae and Freddie Mac, and narrowing FHA’s role by reducing loan limits. Read more about the bipartisan group’s report.

Despite concern over the government’s role in housing finance, an overhaul in the next couple of years may be unlikely due to a lack of consensus in Congress.

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